The United Arab Emirates (UAE) has implemented Corporate Income Tax (CIT) starting from financial years commencing on or after June 1, 2023. This tax regime applies to both resident and non-resident entities.
Resident persons include:
- Natural persons conducting business in the UAE.
- Juridical persons, either incorporated under UAE laws (including Free Zone entities) or effectively managed and controlled in the UAE.
Non-resident persons are those without UAE residency that:
- Have a Permanent Establishment (PE) in the UAE.
- Derive income from the UAE.
- Have a Nexus in the UAE.
On October 18, 2023, the UAE's Federal Tax Authority (FTA) released a Corporate Income Tax (CIT) guide, offering valuable insights into tax considerations for non-resident individuals. The guide, enriched with practical examples, explains key CIT Law elements. This article summarizes the guide, enhancing readers' understanding of FTA's essential clarifications. Serving as a practical handbook, it facilitates compliance with the UAE's CIT framework and supports informed decision-making for non-resident entities.
Understanding Permanent Establishment (PE) in the UAE
A Permanent Establishment (PE) in the UAE signifies a significant threshold of business presence, triggering tax liability for foreign entities. This can arise through a 'fixed place of business PE,' involving a stable and continuous business facility, or an 'agency PE,' where a person or entity conducts activities on behalf of the foreign company with the authority to conclude contracts. If a company's activities exceed these thresholds, it is deemed to have a PE, potentially leading to tax obligations in the UAE. Surprisingly, the guide notes that even a natural person can have a PE if their turnover from UAE business activities exceeds AED 1 million within a calendar year.
Non-resident juridical entities must register for Corporate Income Tax (CIT) and obtain a Tax Registration Number (TRN) if they possess a Permanent Establishment (PE) or nexus in the UAE. However, those deriving income solely from the UAE without a PE or nexus are exempt from CIT registration.
For non-resident individuals, CIT registration and a TRN are mandatory only if the turnover linked to their PE surpasses AED 1,000,000 within a Gregorian calendar year.
Compliance Guidelines for Non-Resident Individuals under Corporate Income Tax (CIT):
Non-resident individuals compelled to enroll for Corporate Income Tax (CIT) must adhere to precise compliance protocols. This necessitates the preparation of standalone financial statements adhering to the accounting standards recognized in the UAE, specifically the International Financial Reporting Standards (IFRS).
Subsequently, registered non-residents are mandated to submit their tax return to the Federal Tax Authority (FTA) and settle any CIT obligations within nine months from the culmination of the relevant tax period. Additionally, these non-residents are obligated to meticulously uphold all pertinent records and documents for a duration of seven years following the closure of the respective tax period. This underscores the imperative for precise financial reporting, punctual tax submissions, and rigorous record-keeping to ensure unwavering compliance with CIT regulations in the UAE.
Tax Rates for Eligible Free Zone Entities:
Within the Free Zone tax framework, entities qualifying as Free Zone Persons will face the following taxation rates:
- 0% (zero percent) on 'Qualifying Income'
- 9% (nine percent) on Taxable Income not categorized as Qualifying Income
Non-resident juridical entities operating through a branch may potentially qualify for the 0% tax rate under the Free Zone tax regime.
Income Sourced in the UAE:
Income generated in the UAE, not linked to a Permanent Establishment (PE), could potentially be subject to withholding tax in the UAE. While the current withholding tax rate stands at 0%, it is crucial to acknowledge that the UAE Ministry of Finance (MOF) has recently updated Frequently Asked Questions (FAQs), hinting at a possible Cabinet Decision that would define withholding tax rates for various categories of income sourced in the UAE (e.g., dividends, interest, royalties, service income). It's important to note that as of now, no official announcements have been issued by the MOF regarding this matter.
Creating a Nexus for Non-Resident Legal Persons in the United Arab Emirates:
If non-resident juridical entities get revenue from real estate located in the United Arab Emirates, they may maintain a connection to the country. In this sense, "movable property" refers to land that is subject to the ability to establish rights, buildings or other structures that are permanently affixed to the ground, and fixtures or equipment that are a permanent component of the ground, building, or seabed.
It is important to remember that the nexus idea does not apply to natural individuals; rather, it only applies to non-resident juridical persons. Interestingly, under some conditions, a nexus might also be regarded as being equivalent to a Permanent Establishment (PE).
Navigating Double Taxation Agreements in the UAE
For non-residents liable to tax under the UAE's Corporate Income Tax (CIT) Law, relief may be accessible through relevant Double Taxation Agreements (DTAs). It is crucial for non-residents to assess their tax standing considering applicable DTAs. In instances of conflict between the CIT Law and a DTA, the latter's provisions take precedence.
Even if an individual or entity meets the criteria for residency under the UAE CIT Law, their tax residency might be assessed differently under a DTA, depending on specific circumstances and agreement terms.
Additionally, the definition of Permanent Establishment (PE) in relevant DTAs may differ from the domestic PE definition in the UAE CIT Law. Therefore, a thorough analysis of applicable DTA provisions is necessary to ascertain the existence of a PE in the UAE.
Navigating UAE's Corporate Income Tax Landscape
The introduction of Corporate Income Tax (CIT) in the UAE, effective from June 2023, is a game-changer for both resident and non-resident entities. Non-residents, whether individuals or juridical entities, must grasp the implications of establishing a Permanent Establishment (PE) or having a nexus, triggering registration and compliance duties. The Federal Tax Authority's (FTA) guide provides vital considerations for non-resident taxpayers under the UAE CIT regime, with practical examples. The interplay between UAE CIT Law and Double Taxation Agreements (DTAs) is crucial, potentially altering tax obligations by reshaping tax residency and PE status. In this evolving tax landscape, non-resident businesses need to reassess operations and tax strategies within the UAE.